Light SA’s board intends to have the company withdraw from the controversial and contentious in-court restructuring process it commenced a few months ago. Whether the Brazilian utility can indeed withdraw from the proceeding, however, depends on its creditors approving such a request. Given the contentions relationship Light has had thus far with its creditors, the plans to restructure its debt out-of-court may not be feasible, paving the way for a contested plan process, which may lead to an insolvency or creditor-proposed plan.
In this article, the Debtwire legal analyst team examines the legal issues related to the potential bankruptcy withdrawal request, highlighting how it could ultimately streamline the negotiations among the involved parties over the terms of a fair debt restructuring proposal.
Source: Debtwire’s Restructuring Database
Light’s multibillion-dollar debt restructuring process has been marked by litigation between the company and its financial creditors related to, among other things, certain controversial protective rulings made in favor of the company. These include the granting of a precautionary measure prohibiting creditors from commencing or moving forward with individual lawsuits against the company and a decision admitting a judicial recovery request made on behalf of Light’s holdco. The judicial recovery filing strategy was adopted by Light in order to circumvent restrictions that prohibited public electric energy services providers holding concession agreements with the country, such as subsidiaries Light Servicos de Eletricidade SA and Light Energia SA, from filing for bankruptcy.
Source: Debtwire’s Restructuring Database
Until recently, all appeals filed by creditors against the decisions issued by the court handling Light’s bankruptcy were by the Rio de Janeiro appellate courts, and to collect on amounts owed to creditors outside of the protections granted to the company were similarly overruled by the court. Thus, the indication that the company could withdraw from the bankruptcy process in order to move forward with out-of-court negotiations is surprising.
However, such a decision is not one for the company to make on its own. According to Sections 35, I, d and 52, § 4 of Brazilian bankruptcy law, judicial recovery withdrawal requests made after a court admits the protection request must be approved in a creditor meeting. The creditor support for this sort of request must be provided by the majority of claims impaired by the process in terms of amount, as set forth in Section 42 of the law.
At first glance, obtaining creditor support for this purpose does not appear to be an issue. Indeed, creditors have been arguing since Light first made its pre-insolvency filing that Light concessionaires are not permitted to file for bankruptcy or have a bankruptcy petition admitted by the court.
Source: Debtwire’s Restructuring Database
However, things could be more complicated than initially expected and creditors may prefer to remain in a judicial recovery proceeding. If Light does not receive sufficient creditor approval to withdraw from the case, the controversial rulings issued in favor of the company that have temporarily protected it from its creditors may be just temporary. The culmination of a judicial recovery process – the approval (or rejection) of the debt restructuring plan proposed by the company – may be the real leverage for creditors in a restructuring.
According to Brazilian law, if creditors reject the reorganization plan proposed by the company, then either: (i) the judicial recovery will be converted into a liquidation proceeding, in which the management of the business would be put in the hands of a judicial manager, and the assets of the company would be sold to repay creditors; or (ii) creditors could present an alternative plan, which could include, among other restructuring measures, a debt-for-equity swap transaction that would ultimately result in the creditors taking the control of the company.
Section 56, § 6 of the bankruptcy law provides that, to be submitted to a vote, creditor-proposed plans must meet certain requirements, including that (i) the plan must not impose new obligations on the company and its shareholders, nor lead them to a situation worse than they would be in the case of liquidation; and (ii) the creditor-proposed plan has the support of either 25% of the total claims impaired by the bankruptcy, or 35% of claims attending the meeting in which the company’s plan was rejected.
In Light’s case, it seems that these supporting percentages would not be hard to achieve, as the restructuring plan originally proposed by the company was considered “immoral” and “unfair” by a relevant portion of the impaired claimholders.
Therefore, in order to avoid the risk of losing control of the business and the debt restructuring process, the Debtwire legal analyst team believes that Light will try to reach an agreement with creditors on the terms of a plan, instead of filing a one-sided case withdrawal request. In the best-case scenario, this agreement could directly provide for a fair debt repayment proposal, via a consensual reorganization plan that would put an end to the disputes. Alternatively, such a plan could at least set the basis for an out-of-court renegotiation, in exchange for the creditors’ support for the closing of the case.
In both scenarios, creditor support could be evidenced by the presentation of consenting letters, thereby making a creditor meeting – to vote on either the plan or the withdrawal request – unnecessary. Just like the creditor-proposed plan possibility and related requirements, this alternative mechanism to evidence creditor support on a debtor proposal was introduced in the country’s bankruptcy regime via a major reform that was signed by the president in late 2020, became valid in early 2021 and was implemented in certain high-profile Brazilian bankruptcy cases, including Renova Energia, Samarco Mineracao and Atvos.
One way or the other, it seems that Light SA’s debt restructuring talks with creditors – which have been moving at a slow pace during the last few weeks – are expected to be streamlined in the near-term, as a consequence of the company’s recently revealed intention to withdraw from its contentious bankruptcy process.
